Year-End Review: Fin. Reg.  (Dec. 29)

Mike & Co.  —

After the GOP captured the Senate in the midterm elections, the main question in the financial regulatory world as 2015 began was whether Congress would rollback key parts of Dodd-Frank Act (DFA) as the GOP-controlled House had been voting to do over the previous four years. 

 How did the two sides fare?  What issues were at play?  What have we learned and what can be expected in 2016? 

 These questions are answered below as the Shelby bill is considered both as standalone legislation and as a rider on the omnibus appropriations bill, and the other major financial regulatory legislation of 2015 is reviewed.

(NB:  some of you may have received a draft version of the below yesterday; you can disregard that draft.)





In the tug-of-war between the financial industry and supporters of Dodd-Frank, the gains and losses were marginal on both sides in 2015.  Once again, the struggle resulted in another stand off between the industry’s efforts to ease the regulatory burden of DFA and advocates’ bid to expand its protections for workers, investors and increase resources for regulators.  Republicans blame leading Democrats in Congress and in the administration.  Financial reformers who spent all year trying to block regulatory rollbacks are crediting them.

The financial industry urged Congress to soften several DFA regulations and sought to do this first through Senate Banking Chair Richard Shelby’s bill entitled The Financial Regulatory Improvement Act of 2015.  The bill, more than 200 pages and consisting of eight wide titles, addresses wide-ranging areas of reform from changes to a key DFA threshold for enhanced prudential standards to the CFPB’s qualified mortgage rule.

Sen. Sherrod Brown, the top Democrat on Senate Banking, said Shelby’s bill went too far:  “Democrats are ready, willing, and able to work with Republicans to get community banks and credit unions the regulatory relief they need right now… Rather than focusing on issues that enjoy broad bipartisan support, this draft bill is a sprawling industry wish list of Dodd-Frank rollbacks.  This sweeping proposal holds Main Street financial institutions hostage to a partisan effort to dismantle Dodd-Frank’s consumer protections and sensible rules for the large banks and nonbanks that played central roles in the financial crisis.”

The main provisions of the Shelby bill:

•   Community Bank Reg. Relief —  Comprising 25 different measures loosening regulations on the country’s smallest banks: relief from privacy disclosure requirements; permission for privately insured credit unions to become members of the Federal Home Loan Bank system; an exemption for banks under $10 billion in assets from the Volcker Rule; and a requirement that the National Credit Union Administration hold public hearings and receive comment on its budget.

The opening title also included several provisions criticized by Democrats, such as a change to the CFPB’s QM rule allowing all loans held in portfolio to be eligible for the rule’s safe harbor provisions — a controversial measure altering how certain “points and fees” are calculated under the QM rule, it removes language regarding affiliated title companies that spurred much of the earlier criticism.  It further makes changes banning certain types of loans, such as “no-doc” loans that helped spur the financial crisis.

•   SIFI Threshold — The bill would have multiplied the DFA threshold mandating tougher capital and oversight on banks by ten times to over $500 billion in consolidated assets, though regulators would have the discretion to examine any banks over $50 billion to be considered systemic.  The Fed Board could make a recommendation to the FSOC to consider a particular bank holding company, though the FSOC would have the ability to launch its own evaluation as well.  The FSOC would be able to vote to change the list of criteria over time, and the $500 billion threshold would also be indexed for GDP growth. Shelby was willing to narrow the $50-$500 billion window for deregulation he had first proposed.  Democratic aides involved in the discussions said Shelby was willing to go as low as $250 billion.  Democrats weren’t willing to go above $200 billion.

•   FSOC Process for Non-Banks —  This title would have codified changes to the FSOC process for designating nonbanks as systemically important, to provide additional transparency to the process.  Some in Congress have criticized FSOC’s designation process as being too opaque.  The FSOC would be required to give detailed explanations for why regulators are considering a designation; provide opportunities for companies to meet with council representatives; analyze a company’s remedial plan for removing a SIFI designation and allow for revisions; and offer an explanation if the council moves forward with a formal designation.  Regulators would also be required to hold a hearing for designated companies at least once every five years and would have to vote to renew the decision to designate.

•   Fed Governance Reforms —  The bill would have made several changes to the Federal Reserve System.  It would require the head of the New York Fed to be nominated by the White House and confirmed by the Senate.  It would also direct the formation of an independent commission to evaluate the structure of the Fed system, including looking at the number and structure of the Fed’s 12 districts.  The Fed would be required to publish a study every two years on its regulation and oversight of non-banks, a provision that would sunset after 10 years.  The GAO would be required to publish a study looking at the agency’s regulation of systemically important institutions, with an eye toward issues around regulatory capture.

•  Swaps/Emerging Growth Firms  —  This title addressed several measures related to SEC registration and regulation.  Most notably, it would remove indemnification requirements on swap data so that it can be shared with foreign regulators more easily and would establish a “grace period” for emerging growth companies working toward an initial public offering.

•   Mortgage Finance System —  The bill included several provisions related to the mortgage finance system, including Fannie Mae and Freddie Mac.  It would prohibit Congress from using guarantee fees to offset unrelated government spending and would ban the sale of Treasury-owned preferred stock in the government-sponsored enterprises without the approval of Congress.  It would also direct the FHFA to provide Congress with updates on the establishment of a common securitization platform and would transition the platform to a non-profit available to approved issuers beyond Fannie and Freddie.  Finally, it would mandate that the GSEs’ risk-sharing levels be at least 150 percent of the previous year’s level, with at least half of the total as front-end risk sharing.

With such a wide variety of significant proposals, the Shelby bill was an overloaded canoe.  Senate Banking reported it out favorably in May, but only on a 12-10 party-line vote, not sufficient to be certain to clear the 60-vote filibuster hurdle to passage in the Senate.

Over the months that followed, members and staff met frequently to discuss which elements of the bill had bipartisan support Shelby’s participation in these meetings was occasional at best and the discussions never really became negotiations.

Committee Republicans Crapo, Moran and Corker did not negotiate in place of Shelby, but they tried to find common ground with a few receptive Democrats on the Banking Committee, including Sens. Warner, Donnelly, Heitkamp, and Tester.

By the end of September, the group came up with a rough framework that covered areas where the Democrats appeared willing to move closer to some of Shelby’s proposals.  The Democrats were able to find some common ground with Republicans on key areas including easing regulations for community banks, creating a new carve-out for regional banks in Dodd-Frank and making changes to the way the FSOC polices big financial firms outside the banking sector.

The ideas were presented separately to Shelby and Senate Banking Committee ranking member Sherrod Brown.  Brown, who had floated an alternative to the Shelby bill consisting only of the Shelby bill’s title on supervisory relief for community banks, was not negotiating alongside the moderate Senate Democrats but his staff was kept in the loop.

In early November, Brown arranged a meeting between all the banking committee Democrats so the four who had been working with Republicans could update the rest on the discussions.  One Some members showed interest and others showed strong opposition.

Then on November 10, Sen. Warren gave a speech on the Senate floor warning her colleagues against going down the same road that led to a controversial Dodd-Frank rollback to weaken restrictions on derivatives trading from being tucked into last year’s spending bill.  She called out Democrats who “want to get something done around here for a change… If there’s anyone in this chamber, Republican or Democrat, who thinks they can slip goodies for Wall Street into these bills without a fight, they are very wrong,” she said, referring to must-pass legislation including the upcoming appropriations bill.  In addition to the pushback from Warren and other outside groups, the compromise effort faced public and private opposition from Treasury.

Warren and reform advocates were mindful that they lost a round last December in the Cromnibus bill, when JPMorgan Chase and Citigroup lobbyists secured a change to Dodd-Frank rules on complex financial instruments known as swaps.

Back in July, Shelby, a senior member of the Appropriations Committee, had his bill attached as a rider on the Financial Services FY 2016 appropriations bill.  But he got almost nothing in the final spending agreement.   After months of laying the groundwork, banks and their allies in Congress missed their big shot at moving a wide-ranging legislative agenda in a must-pass spending bill this year before the 2016 election cycle heats up.
Among the major financial provisions that didn’t make it into the spending package:

•   Fiduciary Duty —  Per DFA, the Labor Department finally put forth a fiduciary rule in April, the first update of the government’s retirement investment advice regulations in four decades.  The rule, which would take effect next year, requires brokers and financial advisers to act in the “best interest” of retirement savers—a higher standard than current regulations, which only require advice be “suitable.”  The new rule aims to eliminate the potential conflict of interests between people who offer investment advice and companies that sell financial products at a time when individuals are made responsible for building their own nest eggs through programs like IRAs and 401(k)s that have largely replaced traditional pension funds that guaranteed life-long benefits. The financial industry has said it would raise the compliance costs and drive many financial advisers out of business while making investment advice unaffordable for middle-class savers.  Efforts to delay that rule making were turned aside.

•  Community Bank Lending Rules —  A number of regulatory changes sought by small, locally focused community lenders, such as an exemption from certain mortgage underwriting rules for mortgages held in a bank’s portfolio.  These were not adopted.

•   CFPB Governance —  A provision to create a board, rather than a single director, to govern the Consumer Financial Protection Bureau, and subjecting the agency’s budget to annual appropriations did not survive.

Some financial regulatory legislation did make the cut:

  •   Fed Dividend—  In a surprise, the banking community lost a sizable source of revenue — the annual Fed dividend paid to member banks, totaling $25 billion.   The highway bill passed earlier this month took some of the money that banks receive in dividends from the Fed to help pay for fixing the U.S.’s deteriorating roads.   The highway bill passed earlier this month took some of the money that banks receive in dividends from the Federal Reserve to help pay for fixing the U.S.’s deteriorating roads.  Wall Street was furious over the precedent of having financial firms pay for infrastructure projects and lobbied to get a provision in the spending bill that would have given banks more flexibility to sell their shares in the Fed’s regional banks but the provision was rejected.
  • USG’s Stake in the GSEs—  A provision passed that prohibits Treasury from selling the government’s stake in mortgage-finance giants Fannie Mae and Freddie Mac until 2018 without future legislation.  The U.S. government bailed out Fannie and Freddie in 2008, and in return received warrants to acquire nearly 80 percent of the companies’ stock along with a new class of preferred shares.  Congress has tried unsuccessfully to pass legislation that would replace Fannie and Freddie with a new system, leading some of the companies’ proponents to push the Obama administration to take action on its own and sell the shares, now enjoined by this provision.

An omnibus rider banning the SEC from requiring corporations to publicly disclose their political and lobbying expenditures managed to survive.  And negotiators included cybersecurity legislation designed to make it easier for the financial firms and others in the private sector to share threat information with the government.

Five years after a crisis that shook the foundations of finance, Warren has public opinion on her side.  A Washington Post/ABC News published October finding that 72 percent of Democrats, 58 percent of Republicans, and 68 percent of independents want the next president to pursue tougher regulations on banks.

That public distrust has forced Wall Street — and financial services writ large — to make oblique arguments that don’t tackle head-on the unpopularity of the industry across the entire electorate. Republicans, trying to avoid an explicit alliance with Wall Street, regard their legislation as “reforms of the reforms” that Dodd-Frank made.




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